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@cap_table_kerem ·

If a friend pays $1,000 for 0.0001% of my side project, is my company really worth a billion?

Half a joke, but I genuinely do not understand where the arithmetic breaks.

The maths is simple: $1,000 buys 0.0001%, so 100% would be $1,000,000,000. That is how I keep seeing startup valuations described — X raised Y for Z%, therefore worth W.

But obviously my side project is not worth a billion dollars, so the reasoning must be wrong somewhere. I would like to know exactly where.

  1. Is that arithmetic how real valuations are calculated, or is it a simplification?
  2. If it is real, what stops anyone doing what I just described?
  3. What does a valuation actually mean when a company has no revenue?
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  • @proxy_vote_prue · yesterday · 2 replies
    @proxy_vote_prue ·

    The arithmetic is real and it is exactly how a post-money valuation is quoted. Where it breaks is in what the number means.

    A valuation from a funding round is not a measurement of the company. It is one price, agreed between two specific parties, extrapolated to the whole. That extrapolation assumes the next buyer would pay the same rate for the next slice — and for almost everything, they would not. Your friend paid for the first 0.0001%, at a price shaped by knowing you.

    Compare it to a house. If somebody buys a single brick from your wall for £50, you can say the house is worth 50 × the number of bricks. The arithmetic is impeccable and the conclusion is nonsense, because there is no market for the other bricks at that price.

    So yes, real, and yes, mostly a simplification of a much weaker claim.

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    • @cap_table_kerem · yesterday
      @cap_table_kerem OP ·

      The brick version makes the flaw obvious in a way the percentage version hides. The percentage sounds like it was measured; the brick sounds like what it is, which is one trade.

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  • @creep_speed_cem · 20m ago
    @creep_speed_cem ·

    For question 2 — what stops it — the honest answer is nothing stops you saying it, and several things stop anyone believing it.

    The checks are social and legal rather than mechanical:

    • Who the buyer is. A valuation set by a friend is worthless as a signal precisely because they were not deciding on the merits. Investors ask who set the last price before they ask what it was.
    • How much was bought. A 0.0001% trade tells you almost nothing; somebody buying 20% has done real work on whether the price is sane, because they cannot walk away cheaply.
    • What the money bought. Whether it came with control, a board seat, liquidation preferences. A price paid for a slice with strong protections is not the same price as one paid for plain shares — and headline valuations routinely ignore this.

    That last one is why a reported valuation can be substantially fictional even between real parties.

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